Ashford Hospitality Trust Inc (AHT) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ashford Hospitality Trust third quarter 2013 conference call.

(Operator Instructions)

I would like to remind everyone that this conference call is being recorded today, Friday, October 25, 2013 at 11 AM Eastern Time. I will now turn the conference over to Mr. Scott Eckstein. Please go ahead, sir.

Good day, everyone, and welcome to Ashford Hospitality Trust's conference call to review the Company's results for the third quarter of 2013 and to update you on our previously announced proposed new platform, Ashford Hospitality Prime. On the call today will be Monty Bennett, Chairman and Chief Executive Officer; Douglas Kessler, President; David Kimichik, Chief Financial Officer; and Jeremy Welter, Executive Vice President of Asset Management. The results, as well a notice of the accessibility of this conference call on a listen-only basis over the internet, were distributed yesterday afternoon in a press release that has been covered by the financial media.

At this time, let me remind you that certain statements and assumptions in this conference call contain or are based upon forward-looking information are being made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous assumptions, uncertainties, and known or unknown risks, which could cause actual results to differ materially from those anticipated. These risk factors are more fully discussed in the section entitled Risk Factors in Ashford's registration statement on form S-3 and other filings with the Securities and Exchange Commission. The forward-looking statements included in this conference call are only made as of the day of this call, and the Company is not obligated to publicly update or revise them.

In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the Company's earnings release and accompanying tables or schedules, which have been filed on form 8-K with SEC on October 24, 2013, and may also be accessed through the Company's website, at www.ahtreit.com. Each listener is encouraged to review those reconciliations provided in the earnings release, together with all other information provided in the release. I will now turn the call over to Monty Bennett. Please go ahead, sir.

Thank you and good morning. Since our IPO in 2003, Ashford has realized tremendous returns for its shareholders, generating a 150% total shareholder return over that period, compared with an 88% total shareholder return for our peers. During the same time frame, Ashford has consistently outperformed the peer average in total shareholder return for almost every yearly period. As of yesterday, our one-year and five-year total return results were 61% and 913%, respectively, compared with an average of our peers of 35% and 205%. Although the return we provide to our shareholders is a function of our operational performance, we have always believed that it is also due in no small part to the strong alignment we have with our shareholders' interests. One of our clear differentiators relative to our peers has always been our high level of insider ownership. Our insider ownership is nearly 19%, compared with the peer average of only 3%. No other management team in our sector can point to this high level of insider ownership, and this strong alignment is a key catalyst to Management's efforts to generate superior shareholder returns.

For those of you that are not familiar with the details of Ashford Prime, earlier this year our Board of Directors approved a plan to spin off an 80% interest in an eight-hotel, high RevPAR portfolio totaling 2,912 owned rooms that will be called Ashford Hospitality Prime. This spin-off will be in the form of a taxable special dividend to holders of Ashford Trust common stock, and is expected to be comprised of common stock in Ashford Hospitality Prime Inc, a newly formed company to which Ashford Trust plans to transfer the portfolio interests. Ashford Prime will be a platform that exclusively focuses on high-rent hotels. Presently, we are in the standard review and commentary period with the SEC regarding Ashford Prime's form 10 registration statement and the approval of the listing of Ashford Prime's new common stock on the New York Stock Exchange. Once we receive SEC and NYSE approval, we will announce the record and distribution dates for the spin-off. We expect the record date to be approximately 10 days following the announcement, and we expect trading to begin in the so-called when issued market about two days prior to the record date. The distribution date is expected to be approximately 10 days following the record date, all of which we expect to be completed some time in the fourth quarter.

During the 10-day period between the announcement and the record date, this management team plans on hitting the road and visiting in person with as many institutional investors as possible. Thus far, we had an aggressive campaign to educate the marketplace regarding the spin-off. We have called hundreds of existing and potential investors, and met with dozens of you, either in person or on the phone. We have been very pleased with the feedback we've received thus far. If we've already met with you, please note that we would be pleased to do so again. In either case, please let us know if you would like to be included in any of our road show meetings.

The Ashford Prime portfolio was specifically designed more conservatively to make this new public entity appealing to a broader range of investors and to be able to capitalize on hotel investment opportunities to maximize stockholder returns. Once the separation is completed, Ashford Prime will have a focused investment strategy, targeting high RevPAR hotels and resorts located mainly in domestic and international gateway markets. Ashford Trust, on the other hand, will continue to focus opportunistically on all segments of the hospitality industry, with RevPAR criteria outside the Ashford Prime investment focus and at all levels of the capital structure. A primary element of Ashford Prime's appeal will be its targeted, lower leverage profile, with a target ratio of 5.0 times net debt, plus preferred equity to EBITDA. We expect this target leverage ratio will result in a lower cost of capital, which facilitates the implementation of Ashford Prime's investment strategy. The platform will be launched with a net debt-to-EBITDA ratio in the mid 6's, and over time, we expect the platform to delever towards the 5.0 target.

Following completion of the spin-off, Ashford Prime will have an option to acquire the Pier House Resort and Spa in Key West, Florida, which was acquired in May of this year from Ashford Trust for its cost plus related expenses. The Pier House Resort is indicative of the hotels and resorts that Ashford Prime's investment strategy will specifically target, with a 2012 RevPAR of $276 and arguably the best location in the nation's second-highest RevPAR market. Prime's targeted assets will be expected to generate RevPAR at least twice the national average, currently approximately $130 and higher. Since we acquired the Pier House in May, it has exceeded our expectations, with RevPAR growth year-over-year of 13%, to $240 for the quarter, and a hotel EBITDA margin increase of an incredible 960 basis points. It's this same Ashford Trust management team that will be managing Ashford Prime under a revolutionary new external advisory agreement that has been structured to ensure that Ashford Prime, like Ashford Trust, has close management alignment to the shareholders.

Since announcing the specifics of this advisory agreement, we have already seen evidence of industry participants seeking to emulate the agreement's structure and its several unique features. First, the advisory fees are based on market value and total shareholder return out-performance, as opposed to just gross asset value. The base management fee will be calculated on total enterprise value. The incentive fee will be a portion of Ashford Prime's total shareholder return in excess of the peer average. Additionally, the advisor, Ashford Trust, will own 20% of Ashford Prime, and insiders will own approximately 19% of Prime. Because of some cross ownership, all combined, Ashford Trust and Prime's insiders will own approximately 36% of this new platform. This high level of insider ownership serves to further align management's interests with our stakeholders. Finally, the advisor is a publicly-traded company, with full transparency and broad institutional ownership, as opposed to being a private company owned by a handful of individuals. Thus, as a result of this revolutionary advisory agreement, Ashford Prime management will be even more highly aligned with shareholders than any internally advised hotel REIT in the marketplace today.

Other factors to consider in the spin-off of Ashford Prime include the existing relationship with Ashford Trust. From a deal flow perspective, Ashford Prime will already have agreements in place with Ashford Trust regarding existing Trust assets. Aside from the option to acquire the Pier House Resort, Ashford Prime will also have an option to acquire another high RevPAR hotel, the Crystal Gateway Marriott, from Trust. Also, Ashford Prime will have a right of first offer on 12 hotels in the Ashford Trust portfolio that meet its investment guidelines, should any of these assets be sold. These agreements immediately position Ashford Prime for growth and provide a dedicated pipeline of investment opportunities which we believe are consistent with its high RevPAR asset focus.

The performance of Ashford Prime's portfolio speaks to a major rationale for this transaction. During the quarter, the portfolio experienced RevPAR growth of 4.3%, driven by a 3.3% increase in ADR and an 87 basis point increase in occupancy. Much of this performance was driven by our West Coast assets, which continue to outperform relative to competitive sets. This includes RevPAR growth of 8.7% for our Courtyard San Francisco Downtown, 9.5% for our Hilton La Jolla Torrey Pines, and 17.3% and 11.2% for our Courtyard Seattle Downtown and Seattle Marriott Waterfront, respectively.

In our financial tables accompanying our earnings press release, we have provided detailed financial information for the Ashford Prime portfolio, as transparency has always been a priority for us. We believe it is essential that investors have ample information to make informed investment decisions. We think it's only logical to provide investors the same financial information that we ourselves find most useful in running our businesses. Since the Ashford Prime portfolio will initially have significantly less hotels than the Ashford Trust portfolio, we believe it makes sense to increase the level of financial disclosure, so we have provided property level operating information for the eight Ashford Prime hotels. As Prime grows, we anticipate maintaining this level of disclosure.

Also to assist interested parties in their analysis of Ashford Prime, our team has prepared an extensive Ashford Prime questions and answers presentation. This presentation is available to the public on our website, at www.ahtreit.com, under the Investor section. The presentation contains answers to commonly asked questions we have already received on the spin-off, as well as additional relevant information that should assist people in their analysis. Additional information can be found in the Form 10 information statement for Ashford Hospitality Prime that has been filed with the SEC. Our Prime presentations have been downloaded over 500 times.

Since its inception, Ashford has sought to create shareholder value by leveraging our core competencies and expertise in the lodging industry. One of the most effective ways we have accomplished this has been by employing new and unique strategies. When the market turned down in 2008, we saw this as an opportunity to utilize interest rate hedges to create new streams of income, while protecting our shareholders' investments. We believe we were the only REIT to employ this strategy. During the time period, while most REITs were diluting their shareholders with stock issuances, we initiated a substantial common share buyback program, which has already generated a large gain on investment for our stockholders, as well as we have sold back into the market some of those shares at significantly higher prices. As of today, those strategies, in conjunction with others, have created over $0.5 billion in share value for our shareholders.

In developing strategies such as these, aimed at enhancing shareholder value, our analysis has always been methodical and extensive. It was this same rigorous analysis and core discipline that brought us to the conclusion that the Prime spin-off will be value-enhancing for our stakeholders, by creating an exceptional, high growth platform, with enhanced access to the capital markets. By creating two separate entities that are able to focus on their respective investment strategies, both Ashford Prime and Ashford Trust will be able to capitalize on the attractive lodging industry fundamentals that we expect to continue for the next several years.

Lastly, our strong total shareholder return performance has been due in no small part to our attractive and well-covered dividend. Ashford has a long history of offering attractive dividend yields to investors. As previously announced, our Board of Directors declared a dividend of $0.12 per share for the third quarter of 2013, which represents an annual rate of $0.48 per share. Based upon yesterday's closing price, the dividend yield is 3.6%, which is among the highest of our peer group and well above our peer average. In fact, we are one of the only couple of our peers that has both an above-average dividend yield and an above-average dividend coverage ratio. In addition, for Ashford Prime, we have provided guidance for $0.01 per share -- per Ashford Trust share equivalent, I should say -- per quarter, including the fourth quarter of 2013.

Before turning the call over to my colleagues to discuss this past quarter's performance, I want to mention a new initiative we have underway. Over the past couple of quarters, our revenue growth has not met our internal expectations. Part of this is market driven and due to our concentration in the DC area; however, we still believe we can do better. In our last call, I had mentioned that we hired a new senior executive with Ashford to drive revenue growth. Sloane Dean has begun this process to revamp our revenue enhancement efforts. Jeremy Welter, here on the call, will give more detail on this in a moment.

Regarding our affiliate manager, Remington, we've also recently taken some meaningful actions over the past couple of quarters. First, we turned over and replaced our senior sales and marketing position which oversees direct sales, such as group, contract and preferred accounts. In addition, we created two new senior positions in sales and marketing to report to this most senior position, overseeing all of the hotels. Separately, on the revenue management side, which oversees revenue management and electronic commerce, we've created and have almost completely filled a number of new positions, taking this department from 11 individuals to over 20, with new, both senior and junior executives. Not only are we increasing the number of executives, but we are upgrading the capabilities for each position. These additions create significant increases in costs for our affiliate manager, Remington, but it's the right thing to do for the platform. In addition to personnel, we are comprehensively upgrading our business analytics capabilities on the REIT side and with Remington. These investments in systems and personnel will materially increase our revenue enhancement capabilities. I am personally overseeing much of this effort. With that, I will now turn the call over to Kimo to review our financial performance for the quarter.

Thanks, Monty. For the third quarter of 2013, we reported AFFO per diluted share of $0.25, compared with $0.31 a year ago. The third quarter of 2012 included $8.1 million of interest rate derivative income, which impacted AFFO per share by $0.09. So on an adjusted basis, our AFFO per share is up $0.03. Adjusted EBITDA increased 7% for the third quarter.

During the third quarter, we saw a steady continuing of positive industry supply and demand trends, which have continued to drive RevPAR growth and improve profitability in the US lodging sector. Based on where we see ourselves today in the current hotel cycle, we expect to see several additional years of growth, as demand steadily rises while new hotel room supply is expected to remain at historically low levels for at least the near term. Since existing credit availability for new hotel construction remains limited, PKF continues to forecast low supply growth of 0.8%, 1.1%, and 1.4% for 2013, 2014, and 2015, respectively. PKF also continues to forecast attractive RevPAR growth of 5.9% for 2013, 7.2 % for 2014, and 8.1% for 2015. It is important to note that the industry's recovery to date has occurred in a weak economic environment, so any significant improvement in the macroeconomic situation could represent potential upside to these forecasts.

For the third quarter, we reported our pro forma hotel operating statistics for both the Ashford Trust portfolio and the Ashford Prime portfolio. The Ashford Trust portfolio includes our pro rata share the Highland Hospitality portfolio, but excludes the Ashford Prime hotels. In terms of our performance, RevPAR increased 3.1% for the Ashford Trust hotels not under renovation, driven by a 3.0% increase in ADR. RevPAR increased 4.6% for the Ashford Prime hotels not under renovation, driven by a 2.6% increase in ADR. Hotel EBITDA margin increased 39 basis points for the Ashford Trust hotels not under renovation and 17 basis points for the Ashford Prime hotels not under renovation. Our Ashford Prime hotels saw an increase in incentive management fees which negatively impacted margin growth for that portfolio.

For the third quarter, we reported a net loss to common shareholders of $24.825 million, adjusted EBITDA of $85.502 million, and AFFO of $24.281 million, or $0.25 per diluted share. At quarter's end, Ashford had total assets of $3.6 billion in continuing operations and $4.5 billion overall, including the Highland portfolio, which is not consolidated. We had $2.4 billion of mortgage debt in continuing operations and $3.2 billion overall, including Highland. Our total combined debt, which really has a blended average interest rate of 5.3%. We currently have 56% fixed rate debt and 44% floating rate debt, all of which have interest rate caps in place, and the weighted average maturity is 3.2 years.

At quarter's end, our Ashford Trust portfolio consisted of 115 hotels with 22,803 net rooms, and our Ashford Prime portfolio consisted of eight hotels with 2,912 net rooms. Our share count currently stands at 99.6 million fully diluted shares outstanding, which is comprised of 80.6 million common shares and 19 million operating partnership units.

Before I turn the call over to Jeremy, I'd like to mention a few facts concerning Ashford Prime. When Ashford Prime is spun out, it will begin with a minimum cash balance, including property level working capital of $160 million. Net of our joint ventures, as of September 30, Ashford Prime had TTM hotel EBITDA of $77.1 million. If you were to estimate, it had annual advisory fees and G&A of $9 million, a trailing 12-month EBITDA would be $68.1 million, and its net debt-to-EBITDA ratio would be approximately 6.5 times, which is well on our way to our stated target of 5.0 times. Non-recourse debt totals $566 million, with no maturities until 2017. Initially, Prime will have no preferred stock. Finally, Ashford Prime will launch with $150 million credit facility. I'd now like to turn the call over to Jeremy to discuss our asset management accomplishments for the quarter.

Thank you, Kimo. RevPAR at the eight properties in our Ashford Prime portfolio increased 4.3% in the third quarter, driven primarily by rate, which increased 3.3%. The four properties located on the West coast all experienced RevPAR growth exceeding 8%, led by Courtyard Seattle, which was up 17.3%. This brings the year-to-date RevPAR gain for Ashford Prime's properties to 5.9%, again, largely driven by rate increase of 4.5%. Moving to our Ashford Trust portfolio, RevPAR increased 1.5%, driven by rate, which increased 2.7%. Year-to-date RevPAR has increased 3.1%, with ADR increasing 3.4%.

This third quarter proved to be a challenging quarter in terms of comparability to last year, for several reasons. First, the Republican and Democratic national conventions that occurred in Tampa and Charlotte greatly benefited our hotels in those markets in the third quarter of 2012. For example, the Tampa Renaissance in our Ashford Prime portfolio had a RevPAR decline of 10.2% for the quarter. Another challenging aspect of the third quarter was a year-over-year comparison in Washington, DC, our largest market in terms of rooms and EBITDA. You may recall that the third quarter was the best quarter of 2012 for our DC assets, thanks to strong summer leisure travel and resilient group business. In the third quarter of 2013, the ongoing sequestration of government spending, fiscal uncertainty, and a less robust book of group business led RevPAR declining 12% for all of our hotels in the Washington, DC market area. During the quarter, government room nights at our 11 DC hotels were down 29%, representing about $2.3 million in lower room revenue.

Additionally, during the quarter, our 697-room Crystal City Marriott Gateway had its ballroom under renovation, which greatly impacted our ability to book group business. But we believe these market dynamics are relatively short-term. In the Crystal City sub-market, we are seeing the bottoming out of office vacancy related to BRAC, with most of the space being repositioned to class-A office space, which will create much stronger demand generators, with less reliance on government business. Overall, we are still bullish on DC's excellent long-term prospects. When DC is added to the adverse impact of the national political party conventions and both are excluded from our results, RevPAR growth would have been 7.9% for our Ashford Prime hotels and 4.5% for our Ashford Trust hotels.

Last quarter, I shared with you that Ashford had added an important position to its organization, a Vice President of Revenue Optimization. Now in place, he is intimately involved in providing a more analytical approach to driving revenues, particularly with the [RFP] for our top 30 hotels, which comprise 54% of our total revenues. Additionally, he has strategies in place to ensure retail transient is being priced by day of week dynamically, ensure maximum profitability from all of our base and crew contract business, ensure we're layering in the appropriate group business for 2014, ensure we are maximizing our exposure to less profitable channels, such as OTAs, and ensure we implement best practices to tackle e-marketing, social media, and new consumer technology.

Now I'd like to give you an update on the early results from some of our recent transactions. First, the acquisition of Pier House Resort and Spa in Key West has been very successful, as Remington implemented a streamlined cost structure, as well as increase in revenues that has resulted in significant bottom-line growth. In its first full quarter under Remington management, total revenue increased 10.9%, while EBITDA increased 67%. Next, the conversion of eight of our brand-managed properties last quarter to Remington-managed franchise properties has had a very successful start. Despite the associated short-term revenue interruption a change in management brings, the eight properties saw RevPAR increase 8.5%. EBITDA margins increased by 742 basis points, with EBITDA flows of 140%. We believe this transaction is and will continue to be accretive to shareholders, as Remington is not only capable of delivering superior results, but we see that franchise hotels sell at a premium multiple in the market place. Additionally, all eight properties entered into product improvement plans, or PIPs, which should further enhance the value of the properties.

Finally, last quarter we shared that we will be converting our 258-room Crown Plaza Beverly Hills to a full-service Marriott at the end of the existing franchise agreement in March of 2015. The conversion will include a PIP estimated at $25 million, which will include an HVAC system upgrade, an extensive renovation of the guestrooms and public areas, a transformational lobby renovation, and exterior upgrades to enhance the guests' sense of arrival. We are especially enthusiastic about this conversion, because of the absence of full-service Marriott supply in the market. We are confident the newly-minted Marriott Beverly Hills will be an extremely successful property in our portfolio.

Turning to capital expenditures, Ashford continues to strategically invest in its portfolio by spending $40.2 million in the third quarter in the Ashford Trust portfolio and $3.1 million in the Ashford Prime portfolio. In the second quarter of this year, we completed a room renovation at one of our Ashford Prime assets, the Hilton La Jolla Torrey Pines. I must say, having seen the results in person, the hotel looks truly stunning, and we fully expect the hotel to leverage this renovation in order to gain significant market share. In fact, in the third quarter alone, the hotel managed to increase RevPAR 9.5%. It's our belief that a rigorous and robust capital expenditure allocation process is an effective element of our broader asset management philosophy. Now I'd like to turn the call over to Douglas.

Thanks, Jeremy. In the third quarter, we remained focused on strengthening our capital structure to prepare for the planned spin-off of Ashford Prime and to better position ourselves for investment opportunities by capitalizing on today's attractive debt market conditions. Looking at our capital structure, in September we completed a $69 million property-level debt financing for the previously closed acquisition of the 142-room Pier House Resort and Spa in Key West, Florida, which we acquired in May for $90 million in cash, or $634,000 per key. As Monty already mentioned, this investment has not only met, but exceeded, our initial performance expectations, with RevPAR growth of 13% for the quarter and hotel EBITDA margin up 960 basis points. The new financing for Pier House has a two-year term and three one-year extension options, with no test requirements for the first two extensions. The loan provides for a floating interest rate of LIBOR plus 490 basis points, with no LIBOR floor.

We are very pleased with the success of this new property-level debt financing, which demonstrates the various opportunities we are seeing currently in the debt markets. Whether it's been a recent uptick in interest rates, these rates and other market conditions still remain very appealing relative to historical debt financing currently in place for several of our assets. This affords us many opportunities to selectively pursue refinancing opportunities within our portfolio to capitalize on these market trends. We are constantly analyzing our debt structure at the property level and will continue to look for innovative ways to maximize value for our shareholders. Presently, we are exploring the potential refinancing of our MIP portfolio, which matures in 2015 and consists of five hotels; the Embassy Suites Philadelphia Airport, the Embassy Suites Walnut Creek, the Hilton Minneapolis Airport, the Sheraton Anchorage, and the Sheraton San Diego Mission Valley. In addition, we are looking at possibly refinancing two smaller hotels where we think refinancing makes sense, given our ability to take advantage of attractive conditions in the debt markets.

Related to the Ashford Prime spin-off transaction, in July we completed a follow-on public offering of 12.25 million shares of common stock at a gross price of $12.00 per share. The cash raised in this offering will be contributed to Ashford Prime in connection with the spin-off, moving Ashford Prime substantially closer to achieving its target net debt plus preferred equity to EBITDA ratio of 5.0 times. Our goal with this targeted leverage level is to potentially enable Ashford Prime to receive a better valuation multiple, resulting in net accretion to Ashford Trust's shareholders. It's important to recall that during the last financial crisis, we purchased over 70 million of our shares at an average price of approximately $3.00 per share. Selling these 12.25 million shares back into the market at $12.00 represents a significant gain on that investment for our shareholders. As we move closer to completing the spin-off of Ashford Prime, we remain optimistic that our capital structure activities, including the creation of this new entity, will ultimately enable us to pursue accretive investment opportunities through a dual platform approach.

We continue to see many potential investment opportunities in the marketplace, but many of them simply do not make sense for us to pursue, given our historical capital structure and higher cost of capital. We believe that the spin-off and low levered strategy will provide us an exceptional high-growth platform with enhanced access to the capital markets, thus granting it the flexibility to pursue high RevPAR assets, both in the US and abroad, which will serve the best interests of its shareholders. At the same time Ashford Trust will continue to benefit from attractive lodging industry fundamentals, while pursuing a broader range of investment opportunities.

Recently, Ashford celebrated its 10-year anniversary as a public company, starting in 2003 with a blind pool with just over $200 million. Since that time, we have grown substantially, now having approximately $4.5 billion in total assets. Our goal throughout our history has remained consistent, to deliver superior shareholder returns through investments in the lodging industry. As Monty discussed earlier, I think our track record speaks for itself. Given our team's experience to date, we view the spin-off of Ashford Prime as the next phase in our growth cycle. As 19% holders of both Ashford Trust and Ashford Prime, we're invested right alongside all of you. That concludes our prepared remarks, and we will now open it up for your questions.

Thank you. Your first question comes from the line of Andrew Didora from Bank of America. Please go ahead.

Hello. Good morning, everyone. Monty, I know you guys typically don't give an intra-quarter update, but just curious, just in terms of the impact that DC had on 3Q. If you could maybe give us any color, post -- during the government shutdown, in terms of the impact that it had -- that it's having on your portfolio in October?

The shutdown had an impact -- has an impact on our portfolio in the DC area for the quarter. But as far as specifics, we do like to tend away from providing guidance, for the reasons that we've discussed in the past. We are hopeful, though, that these shenanigans in DC will come to an end, with the sequestration and with the shutdown, and remain hopeful that's the case. And we're bullish on the long-term prospects of DC. It's not uncommon during a deleveraging like this, whereby government expenses get cut back for a little bit, for a little while. But over the long-term, DC will continue to be a great market, and we've got some great assets there. So we're just going to have to weather this short-term little storm that's going on over there.

Got it. Fair enough. And just in terms of the Prime portfolio, how should we think about the margins here going forward, just in light of the incentive fee payment in the quarter? Did these just really kick in, in 3Q, or have you been paying these for a while? Just trying to get a sense for when you might anniversary some of these payments.

Yes. The payments have been going on, and they have been increasing as the performance has been increasing. And I think what we'd like to do, Andrew, is probably off-line for you and anybody else that's interested, is go through those incentive fee amounts for these different properties, so you can get a handle. Some of the incentive fee amounts are as low as 20% of EBITDA above a certain level, and in some cases, it's as high as 50%. So I think for your modeling purposes, it would be helpful if we went through those on a more detailed basis. And some of those, we're in the money, or I should say, the manager is in the money that's earning those fees. And in some cases, they're a pretty good ways from earning them. So like I said, we just need to probably go through that individually with you, so that you can construct your models a little more accurately.

Got it. Okay. That sounds good. And then just finally, sticking with Prime here, and sorry if I missed this in your prepared remarks, but when do you think you could exercise those options, particularly on the Pier House? Do you see this as something that could happen on day one, or is there a reason why you might wait to execute on those?

We've got options on two properties. The Pier House, I think that option goes for something like 18 months, and then Gateway is something like a year, but we can't do it until starting six months after the spin-out occurs. We're anxious to grow the platform, and we'd like to do it relatively soon, but it depends upon market conditions. Ideally, we'd like to raise some capital around it, in order to continue to move our debt to EBITDA ratio down. That is something that our investors want.

That's what we want. And so that depends upon market conditions and the availability of capital. And so we'd like to do it sooner rather than later, but it just depends upon whether we think we can do the whole package or not and how much equity we could potentially raise around it. So, we've got some time. So if market conditions don't cooperate, we can wait it out. But if they do, again, our preference would be to move sooner rather than later.

Okay. That's great. That's it for me. Appreciate it.

Thanks.

Your next question comes from Ryan Meliker from MLV Company. Please go ahead.

Good morning, guys. Just a couple of quick questions I was hoping you might be able to give us some color on. First, how close are you guys to determining a timing for the spin-off? Are we talking imminent, is it a week or two away, or are we talking towards the end of fourth quarter?

Well, there's some mechanics involved. In the script, I went through about a 10-day period for a record date, and a 10-day period for the distribution. So as soon as we get the SEC clearance, we've got those timelines in front of us. We're hopeful that we'll get that SEC clearance quite soon. They've given us indications that we should get it soon.

But it is the SEC, and they can take a lot longer if they want. So it's hard for us. And before this call, we talked about giving guidance on it, but the problem is that it's just not in our control. It's all with the SEC right now. And like I said, they've indicated that it should be very soon, that they'll give us clearance, within days. But it's up to them, and they might take weeks. So as soon as we know, we are going to be moving forward with establishing the record date and then the distribution date. So that's the best we can give, because that's the best we know.

No, that's helpful. It sounds like you're optimistic that it's not going to be towards the end of December, and hopefully sooner than that. And given that dynamic and the impact that the spin-off is going to have on your financials in the quarter and the uncertainty surrounding the exact timing and the seasonality in October versus November, versus December, track versus what you provide to the Street, are you going to be able to -- or have you thought about the idea of giving guidance out for what AHT and AHP will do in that first quarter, given it's going to be a weird, choppy type quarter with the spin-off involved? Or are you going to be optimistic that the street's going to get it close enough to right, so there won't be any surprises?

Well, we've kicked that around a little bit. Because there's another issue, and that is the fact that Marriott has changed their accounting from '13 period to '12. And that also affects the numbers. And then you've got the split up of the platform, and partial way through the quarter. So we've been sitting here internally talking about what that means. We haven't decided to give guidance, but we also know that's an issue. So we don't have an answer for you right now on that, Ryan. But we do understand the issue, and we're trying to figure out the best way to tackle it.

It's just a shame to surprise the street with a number that could have been avoided, especially if your fundamentals end up coming in line with expectations. And then the last question I had was, can you give us any color -- I apologize if I missed it earlier in the call, but with regards to what you're expecting for your corporate rate negotiations for next year, how those are tracking? And then what your group pace looks like for next year? I know group isn't a big component of your business, but it's always helpful to get that gauge.

We don't give out on the group side. It's gets a little too much into guidance for us. But as far as the rate negotiations, we are being aggressive. Our attempts in these negotiations, I don't think are different than our peers, than the 4% to 7% range is what we're targeting for those preferred accounts, negotiated accounts across-the-board, and some of those are being locked down and some of them are still open. So again, we're not doing anything different, I think, than what our peers are, in that regard.

Okay. That's helpful. And then, Doug, real quickly, you talked about going to market, looking at the MIP portfolio and a couple other assets. Are you guys at the stage where you're looking at the Highland debt, potentially refinancing that? I know that's available for refi in March.

We have term remaining on the Highland debt, and our view there is that we want to be opportunistic with respect to the performance of the portfolio, as well as what's taking place in the debt capital market. So we have a fair amount of runway. Moreover, I think the view that we have is that it's something that we'll certainly start discussing more about internally the beginning of next year, but it's a little bit early, Ryan, to start approaching that.

Ryan, to give you some color on that, the pros and cons are that the sooner we do it, the sooner we get out of a cash sweep that's in place on that debt. But the later we do it, the more proceeds we get. And I want to emphasize that we have a partner in that, and the decision to refinance is going to be made with our partner, Prudential. I'd be surprised if it happened before March. And as far as after that, I'd say soonest case would be sometime in 2014, later in the year. But again, it depends upon some other issues that are going on in our platform and our cash and the like, because the longer we wait, the more proceeds that we can achieve. And we're giving serious consideration to those additional proceeds, to setting those proceeds aside as essentially an offset against whatever debt level we have, to keep our net debt levels constant or lower. So there's just a lot of considerations, so it's just hard for us to give any indication on the refi of that.

Okay. But it sounds like it's not going to be by March. It'll be later in 2014, at earliest?

I'd say that's right. That's our current thinking.

Great. That's all I had. Thanks a lot.

Thanks, Ryan.

Your next question comes from Nikhil Bhalla from FBR. Please go ahead.

Hello. Good morning, everyone. Just a question on your strategy for AHP when it comes to buying assets outside of the US. You mention a lot about international expansion there, kind of refer to it. Could you just give us some sense of how big you think that could be, how soon that could be, or are you looking for portfolios, are you looking for single assets? Just any color.

Sure. We're looking for both, for single assets and for portfolios. We have some tension there in that we don't want to do anything too big, because then it's disproportionately large for the platform. That platform is being launched at about $1 billion in size, plus or minus. On the other hand, you want it of certain size, because to have the assets overseas, there's additional overhead and costs relative to servicing it and be involved with it. But that's kind of an offset. Also, as we look around the world, all the countries are in different stages of development and different stages of where they are in their deleveraging and different stages of recession. So we are just trying to remain thorough.

We've spent a couple of years now being involved in the European markets, attending conferences over there, have people on the ground over there looking for opportunities. And here in the more recent past, we've really started looking in Asia, as well, for opportunities. A number of us just got back from a conference over there. So we're trying to be very, very thorough and measuring twice and cutting once on these acquisitions. And as far as the opportunities that come up, it's just hard to say.

We could have something like a Pier House jump up, that's right here close to home, which has been a great acquisition for us, or an opportunity could jump up overseas somewhere. Needless to say, on our first acquisitions overseas, especially, we want to be especially cautious, both for our own sake and out of respect for our investors and not jumping out there with some large international acquisitions that are relatively large for our platform. Hopefully, that provides a little color for you.

Sure. Thank you, Monty, for that. And just a follow-up question on the revenue side, I think you referenced some revenue initiatives that you are taking and Remington is taking, with beefing up the revenue management team. Could you just give us some sense of where the opportunity might be to increase the revenues there? What could specifically happen?

Sure. First of all, it's not like the revenues, taking in context this quarter, they were okay, if you could turn your eye to what's going on with DC and in this year-over-year problems in Charlotte and this other market. So we were pretty pleased with that revenue performance, aside from those sectors. So that being said, we think there's always room for improvement. And so we want to be very intensive about our efforts there. As far as the areas of improvement, I couldn't give you one specific area. Looking across the landscape, we think that there's opportunities really just about everywhere, whether it be contract and wholesale FIT business, preferred account business, group business, all that's on the direct sales side, or over on the electronic commerce and revenue management side, of all the different booking channels over there and yield management and revenue management. We are seeing, the whole industry is seeing, a move more and more away from direct sales towards electronic commerce.

And that has been a trend that's been going on for 10, 15 years, and continues to move that way. And because of that, we just wanted to double down on our electronic commerce and revenue management capabilities, the personnel, the number, in order to make sure that we're always ahead on that front, but at the same time, not letting off the pedal over on the direct sales approach. And we've brought in some new people recently, some great people, and created a few new positions. We just want to continue to be a leader when it comes to revenue. You see the great numbers that we turned in on the Pier House Resort, and it's delivering these types of numbers which gives investors great confidence in Ashford, and what leads to our performance. And so it's just vital to us to continue to be on the cutting edge.

Thanks, Monty.

Your next question comes from Robin Farley from UBS. Please go ahead.

Two questions. One is, I know you talked a little bit about DC in Q4 and how you didn't want to really be giving guidance. So without quantifying it, can you just talk a little bit qualitatively about, since the end of the shutdown whether you've seen occupancy and business levels fully return to normal right away, or do you think there's still some lingering impact or some canceled travel that didn't come back? In other words, how quickly has it snapped back, without even quantifying, if you don't want to, just qualitatively, if you can give some color?

Well, it's hard to say what's normal in DC these days. Because pre-sequestration, post-sequestration, and then the sequestration itself was compressed over a small number of months, and that should be changing. So there's a number of moving parts. We also have, as you know, the headwind of this new Marriott opening up in the spring there in DC. But Jeremy, is there anything you can answer there for Robin without providing guidance?

Yes. What I'd say is, the new baseline was set in May of this year, over the last five months, with a cut in government travel that was fairly consistent month-to-month in our portfolio, and it was about -- around 30%. There was probably a little bit more in September, in anticipation of the government shutdown. But heading into this new fiscal year in October, the sequestration cuts are not as severe on a month-to-month basis. So sequestration should have less of an impact in the fourth quarter to the industry, as well as the first quarter of next year. And then when you cross over to the second quarter of 2014, on a year-over-year basis, you're kind of comparing apples to apples, where sequestration is in both of the numbers.

Realize, he's talking just about sequestration and not about the shutdown.

That's correct. And then of course, you've got the inauguration in January that some of the hotels in DC did benefit from in 2013, as well as the -- whatever may or may not happen with the new government budget in January, whether they extended the deadline.

Okay. And any thoughts on the last week to 10 days, whether to a degree that there had been some disruptions specific to the shutdown, whether you feel that that's come back?

We'd just rather not give that level of detail of guidance at this point, Robin.

Okay. Okay, sure. And then just the other question is, you talked a little bit about corporate negotiated rates and what you're targeting for next year. Roughly where do you feel that they ended up coming in for 2013? What level of increase?

Oh, for this past year?

Yes.

Maybe for next year?

No. In other words, I know right now, in November, is the time when you're nailing down 2014 rates, and so you have a certain target. I'm curious where you feel that it -- the average came in for 2013?

It's about 4% to 5%, on average.

Okay. Okay, great. Thank you.

Your next question comes from Patrick Scholes with SunTrust. Please go ahead.

Hello. Good morning. Monty, sort of a high level question for you here, as it relates to how you feel going into 2014. Would you say you feel -- since we last heard from you on earnings back in August -- would you say you feel more optimistic than that time, the same, or maybe not quite as optimistic? Just directionally.

I feel optimistic about 2014, with the caveat of government business and what's going on in DC. That's just a big unknown. But absent that, absolutely, quite optimistic for 2014.

Would you say you feel more optimistic today than you did a couple months ago, with the exception of the government?

I'd say about the same.

Okay. And then a more specific question, just on the quarterly results. I apologize if I didn't find this in the reports. What was their RevPAR growth for the Ashford legacy portfolio and Highland portfolio? And that's the first part. And then what was the margin improvement, if there was improvement, for the Highland portfolio?

You didn't find it in the numbers, because we changed our reporting this time, Patrick. We started reporting on Ashford Prime this quarterly, and I just made the call that reporting on Ashford Prime versus Ashford Trust, and then within Ashford Trust of legacy versus Highland, and then Highland being a 71% interest, all that was just too complicated. So we just consolidated Trust's reporting and Prime's reporting, meaning that for Trust, it's not broken out any more between legacy and the Highland portfolio.

But can you, I guess, provide that at this moment? What was it --?

I don't know what it is here on the phone, but maybe these guys in a call afterwards be able to get you that information.

Okay. No problem. Thank you.

Your next question comes from Whitney Stevenson with JMP Securities. Please go ahead.

Hello there, guys. Thanks for taking my question. It's perfectly possible that I've completely missed this somewhere. But have you set the peer group that Prime will be bench marked against?

Yes. It's in our filing.

Okay. Perfect. That was my only question. Thank you.

Okay.

Your next question comes from Thomas Allen with Morgan Stanley. Please go ahead.

Hello. Good morning. Renovations appear that you may have been more of a headwind this quarter than quarters past. Can you help us think about the impact, and then what should we expect as we go into the end of the year, next year? I know you give this chart at the back of your release, but unfortunately I can't really read it. And then, if there could be any color -- I think most of the renovation disruption over the past few quarters has been at the Highland JV. Is that still the case? Thanks.

Regarding your comment about not being able to read it in the back, is that because you can't see the x's on there? [Laughter]

Meaning more -- I'm sure if I was a better analyst, I could say that I can add up the number of rooms that are renovated and maybe say that 4Q would be more of an impact in renovation than 3Q, but maybe I'm not.

I see. It's not as helpful as it could be. Okay, no problem. That's good information for us to know, because we might change reporting so that it can be more helpful. Jeremy, do you want to answer his question?

Yes. We're going to have a little bit more rooms under renovation in the fourth quarter in 2013. And then if you look at our proposed 2014, we're very similar in the first quarter in total rooms that will be out, with a little bit more in the second quarter of 2014.

Okay. That's helpful. And then is it still mostly the Highland JV that's the headwind, or is it --?

A lot of it is Highland. And once you get through the second quarter of next year, the Highland portfolio is going to be in great shape from a capital standpoint. So we're very excited about it.

Okay. That's helpful. Thank you. And then just in terms of the Nashville market, I know you're renovating the Renaissance there, but you've seen the recent opening of the Omni, I think, at the end of September? Has that had an impact on your forward bookings or any impact on transient business so far? Thanks.

I can't comment on -- because of guidance. But what I can say is that if you look at the TAP report for Nashville, in 2014 and 2015, it is one of the strongest markets that we have hotels in. So we are blowing through the renovation as fast as we can, just because we want to benefit from all of that business that's going to come in 2014. It's a huge, huge lift. So even though there's been a lot of new supply, that convention center has been fantastic in forward-looking bookings, for the city as a whole.

Typically, we find that when a new convention center opens, even though there's not a lot of supply coming in, the first year or two, you get a good lift. It's after that you've got to sit down and worry about whether the supply and demand mix are good for the long term.

Okay. Helpful. Thank you.

Your next question comes from Jordan Sadler with KeyBanc Capital Markets. Please go ahead.

Hello, guys. It's Austin Wurschmidt here with Jordan. Just had a question related to DC. I was just curious if there was any disparity in the performance among your suburban and more centrally, or urban hotels across the metro?

Sure, I could take that. This is Jeremy. The District did perform better than our Crystal City and non-Crystal City DC assets. The Capital Hilton was impacted on a year-over-year basis, because it had incredible group business in the third quarter of 2012. And Crystal City Marriott Gateway did have its ballroom under renovation, as well. And so that disproportionately hit it. But when business is soft in the DC market and there's not a lot of compression within the DC market, then those hotels outside of DC do tend to perform a little bit worse on a year-over-year basis, and that certainly played out in the third quarter of this year.

Have you guys considered lightening up your suburban exposure in the DC metro, given it is your largest market? So just curious on your thoughts on that.

We have. And we've talked about it. The only problem is this is the worst time to do it. So if we did it, we'd wait towards a more favorable climate, in order to do that.

Thanks. That's helpful. And then based on the information that you guys had given in the HP Q&A presentation, which was very helpful, by the way, it seems that HP plans to exercise its option to acquire the Crystal Gateway Marriott, and if so, what would Prime's exposure to DC be pro forma that transaction, because I think it's already around 20% with the Capitol Hilton?

Well, the decision to exercise that option will be at the discretion of the Board, when the time comes. And that exposure to the DC market will be one of the big points for the Board to consider. And in that case, it also depends upon valuation, because that price has not been predetermined. So it is a concern, it is an issue, and it will be looked at very closely. So don't consider that it'll automatically be brought over. Prime needs to look at it and see if it's in the best interest of Prime to do so or not.

That's fair. Is there any debt associated with that property?

Yes. There is debt associated with that property. If you're looking at the amounts here, we're looking it up for you.

There are no further questions at this time. I will turn it over to management for closing remarks.

Just to finalize, just to answer that question about the debt amount, do we have it here? $102 million. $102 million is the amount of debt on that property.

That is all of our comments. We look forward to talking to everyone on our next call. And in the meantime, we hope to have the successful launch of Ashford Hospitality Prime. Thank you.

Ladies and gentlemen, that does conclude our conference call for today. Thank you for participating. You may now disconnect your lines.